NEWSROOM

Chinese Online Retail Sales: more than 7% of total retail spend

Wednesday, September 04 2013

BDLIVE | BEIJING recently announced the "Broadband China" initiative, with the grand ambition of expanding broadband coverage to the entire country by 2020. Of the numerous goals behind the plan, enhancing rural China’s role in the economy while increasing domestic consumption are two that resonate highly with the country’s leaders.

China’s online populace is estimated to be close to 600-million by the China Internet Network Information Centre, giving it a penetration rate of 44%. While these figures are debated as overly optimistic, they are still far behind developed economies’ average penetration rate of 77%.

Nevertheless, China’s online retail market generated revenues of $210bn in 2012 and grew at a compounded annual growth rate of 110% since 2003. It is also expected to overtake the US as the world’s largest online retail market in 2013.

Chinese Online Retail Sales accounted for more than 7% of total national retail sales last year. With only an estimated 150-million people having actually purchased goods online so far, the internet could still make a significant contribution toward growth and consumption in the world’s second-largest economy. The incentives for Beijing to connect its citizens cannot be overstated.

While gross domestic product growth and domestic consumption are essential to China’s leaders, the location of the growth and who benefits most from it is equally significant. The income inequality gap between rural and urban China is widely acknowledged as too high. Its importance to the country’s leadership was reflected by the fact that departing premier Wen Jiabao raised it in his final keynote address to the nation as a stumbling block to China’s developmental goals if not adequately tackled.

The stories covering the rise of "Taobao villages" in rural China illustrate the potential benefits of national connectivity. The term — coined by Alibaba, the e-commerce giant — refers to a village in which 10% of its residents operate a Taobao online store. They collectively achieve annual sales of more than $1.6m. According to Aliresearch, in 2012, the 14 largest Taobao villages collectively operated more than 10,000 online stores, at an average of 715 stores per village, and generated about $814m in sales.

Particularly noteworthy regarding internet sales in China are the associated incremental sales. While internet sales in many developed economies simply replace offline sales, a study by McKinsey Global Institute shows that online purchases in China support an additional 40% in sales. For every $1 spent online in China, 40c in offline sales is generated. The study further finds that incremental sales are even higher in less developed and rural areas.

While the Taobao villages grab the headlines, the benefits that China’s leaders desire are seen when looking at the other 585,000 online stores that Alibaba says are located in villages and towns across rural China. Usually, the rise of a Taobao village begins with locals selling agricultural and handmade products to city dwellers. As the popularity of their goods increase, production capacity and employment expand accordingly. Some entrepreneurs even use advantages such as lower wages to expand their product offering to manufactured goods.

The mushrooming number of business ventures in these villages has led to the accumulation of wealth for residents. It also attracts migrants from neighbouring villages looking for employment or the opportunity to open their own online stores. Consequentially, numerous forms of investment and local development begin.

With local governments still predominantly evaluated on their ability to spur GDP growth in the provinces they govern, hard infrastructure is then constructed to assist locals in their business endeavours. While many of these villages are still early in their developmental cycle, their residents’ standards of living should rise alongside the establishment of social and economic infrastructure.

The potential hurdle of computer literacy among the rural population can only be surpassed once the internet is available. Local governments are already following Shandong’s example of running educational programmes that help village residents set up online stores.

While numerous factors are needed to spark the development of rural China, Beijing sees the internet as one way of kickstarting the process. It has the power to eliminate borders and provide rural China with an opportunity to develop and prosper — and the many similarities with rural Africa makes one wonder whether such an initiative could work in African countries too.